Tuesday, May 21, 2013

Usual Post Q*

Dylan Matthews writes that the US Treasury is not making profits off of student loans. The loans are risky, so the market interest rate on them is higher than the one the Treasury charges.

As always I denounce this argument as nonsense.

My comment

I don't think there is anything wrong with saying the Federal government profits when it buys risky assets. Yes that would mean that it is trivially easy for the US Treasury to profit since it pays such a low interest rate. However, even net of losses due to defaults, corporate bonds do in fact pay more.

Greek bonds not so much. They are probably a low expected return investment as well as risky. Massive us ownership would increase domestic Greek political pressure to default (their logic would be that the US can handle it as indeed the US can). It would probably not be profitable for the Treasury to invest in Greek bonds. This is a very unusual extraordinary feature of Greek bonds. The Treasury did not invest in preferred stock of banks to make a profit, but it made a profit. It looks very clear to me that it will make a profit off of Fannie and Freddie too (it has most of the money back already and still owns the shares -- the dividend yield so far has been absurdly outstandingly excellent).

As I accept the argument that there are huge profit opportunities for the Treasury, then why wouldn't I think that we solve the long term debt problem by issuing more Treasury bonds and buying say 10% of all corporate bonds (oh and 10% of equities too) ? I do think exactly that.

Now it is true that even with a diversified portfolio (such as student loans) the Treasury bears some risk (really it hides the risk from citizens who own the Treasury but aren't Ricardian). This is an additional benefit. It means that when there is a recession there is an automatic increase in the deficit (as more students default). This is an automatic stabilizer.